Permian Basin in-basin sand production by one count has reached more than 60 million tons/year, and in-basin operations are growing in other areas, reducing demand for the ever-popular northern white as companies work to reduce costs and improve efficiencies.

During a fourth quarter conference call, U.S. Silica Holdings Inc. CEO Bryan Shinn said demand for in-basin services is increasing. About 70% of capacity was in-basin last year, and the provider’s Permian capacity is expected to triple in 2019 with the startup of the West Texas mines in Crane County (4 million tons) and Lamesa (6 million tons). Both were mechanically complete at the end of March.

Shinn said he expected to see substantial growth for in-basin sand because of the company’s SandBox unit, the last-mile logistics business that manages the Permian proppant supply chain. Typical pricing pressure at the end of 2018 was expected to lead to flattish volumes in 1Q2019, “but I will say that the local sand pricing is holding up very well,” while there was “pressure” on northern white demand.

SandBox ended the year with 90 crews, and “we had approximately 24% market share based on the amount of sand moving through our equipment...Our existing equipment is 100% sold out for 2019, and we’re building new equipment as fast as we can to meet very strong customer demand.”

Many exploration and production (E&P) customers have embarked on “substantial high-efficiency well-completion programs...Given our current level of customer demand, I believe that our original projections of reaching 25% market share in 2019 are conservative, and we should be able to do better.”

Based on recent comments from E&Ps, Rystad Energy’s team concluded that the adoption rate for Permian sand could go as high as 80% this year, with nationwide in-basin sand demand exceeding northern white.

“From a pure cost perspective, the economic benefits to switch to in-basin sand are evident,” analysts noted. “Operators can save $40-50/ton by using in-basin sand, which reflects rail transportation cost from Midwest mines to Texas.”

One question is whether oil and gas production rates using in-basin sand over the longer term are as good as from northern white, which is delivered from Midwest mines to production areas often many hundreds of miles away.

Beyond the completion activity outlook and lateral length designs, data has yet to determine whether the Permian’s finer dune sand, aka Brown sand, for example, can match the high crush strength and conductivity of northern white proppants. Rystad recently conducted a deep-dive analysis of well performance using both kinds of sand in the Permian’s Midland and Delaware sub-basins.

Typically, a new well in the Delaware in New Mexico requires about 7,500-9,500 tons of sand. If all of the proppant used is in-basin and 40/70 or 100 mesh, “we should see cost savings of $300,000-500,000 per well,” the Rystad team estimated.

The cost savings were even higher for Delaware operators that have switched to two-mile laterals with 2,500-3,000 pounds/foot intensity. “Such wells require up to 15,000 tons of proppant, and the choice of in-basin sand might generate $750,000 cost savings per well.”

The availability of in-basin sand in the Permian expanded last year, opening up opportunities to increase proppant in every well, Rystad analysts found. For example, the typical proppant use per horizontal well increased from about 15 million pounds between 3Q2017 and 1Q2018 to 16 million pounds in 2Q2018. Overall, sand use averaged 17 million pounds per well in the first six months of 2018.

“Interestingly enough, typical basin-wide proppant intensity has been hovering around 2,000 pounds per foot for many quarters already, so the uptick in proppant use per well last year was entirely driven by an increase in typical lateral length,” analysts said. “One might argue that the availability of in-basin sand paved the way for maintaining the high proppant intensity on longer laterals as more operators were shifting toward field development mode.”

The number of completed wells also shifted upward between last April and September, resulting in a 30% increase in the running rate of proppant consumption, according to data. More than 5 million tons of sand/quarter, “an unprecedented amount” have been pumped into the Delaware and twin Midland sub-basin since 2Q2018.

Still, in-basin sand has to prove as worthy as northern white. Arguments have been made about the impact of in-basin sand on initial production data, but Rystad analysts said the empirical production information “does not really support this as of today.”

Rystad identified 289 horizontal wells in the Permian that were fractured between 2012 and 2016, produced for more than two years, and were fractured with Brady brown without northern white additions.

“In both the Midland and Delaware, wells with Brown sand exhibit steeper decline rates than the wells with northern white sand on average,” analysts said. “The difference is quite immaterial on the Midland side of the basin,” where “Brown sand use leads to an 88% average decline by the end of Year 3, as opposed to 85% when northern white is applied.”

In the Delaware, the difference in well performance was found to be more dramatic, with the average well using Brown sand exhibiting a 73% decline over the first 12 months following peak, as opposed to 55% for northern white sand.

Sand Self-Efficiency

Local sand sources also are benefiting operators in the Eagle Ford and Haynesville shales, as well as Oklahoma’s SCOOP/STACK, aka the South Central Oklahoma Oil Province and Sooner Trend of the Anadarko, mostly in Canadian and Kingfisher counties.

PLG Consulting President Taylor Robinson recently wrote about the in-basin trends in a recent blog post for RBN Energy LLC.

Within the past couple of years, the Eagle Ford, Haynesville and Oklahoma plays “have largely reached -- or are well on their way toward -- self-sufficiency as far as fracture sand supply is concerned,” Robinson said. “Each region still rails in at least some northern white sand to meet whatever needs E&Ps and their pressure pumpers have for that long-favored commodity, but each also appears to have more than enough local sand capacity to address the rest of their fracture sand requirements.”

Demand for sand proppants this year “will be up 5% to 10% at around 110 million tons at $50/bbl oil, but could increase to over 130 million tons annually at $70/bbl oil,” according to U.S. Silica’s Shinn. “We expect that most in-basin sand supply under construction will start up, but we do not forecast significant additional mine developments in the industry this year.”

By the end of 2019, Shinn said he expects two-thirds of the total proppant demand for E&P development will be supplied by in-basin sand, with one-third supplied by northern white.

Meanwhile, a consortium of leading Texas sand mining companies have launched the Industrial Sand Producers of Texas (ISPOT) to coordinate between industry, local communities and government officials on best practices for the industry.

“Until 2017, most industrial sand used in hydraulic fracturing in Texas had to be shipped across multiple states before reaching end users,” ISPOT noted. “Producers soon realized much of the local sand was of sufficient structure and quality to be used for industrial purposes. As a result, the sand industry has been rapidly growing to meet the needs of hydraulic fracturing operations without the cost and delay of long-distance shipping.”

ISPOT was created in part to help companies work to build stronger communities in the sparsely populated region. Several sand mining companies already have committed more than $26 million for road improvements to the heavily traveled routes.

"While we are all individual companies, we still have common goals in many areas, including the environment, health and safety," ISPOT President Rick Fletcher said. "We hope to grow the association to include even more industrial sand miners and others related to our industry. Our industry stands ready to work together on issues that will ensure safe facilities, improved infrastructure, stronger communities and environmental stewardship, continuing to fuel the robust Texas oil and gas economy."